Tax & Accounting Blog

Three Percent Withholding by Government Payers: House Subcommittee Hears Requests for Repeal

ONESOURCE, Tax Information Reporting, Trust Tax June 23, 2011

On Thursday, May 26, the U.S. House of Representatives Small Business Subcommittee on Contracting and Workforce held a public hearing titled, “Defer No More: The Need to Repeal the 3% Withholding Provision.” 

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) added section 3402(t) to the federal tax code, requiring federal, state and local governments to withhold 3% federal tax from payments for goods and services.  It still hasn’t taken effect, but on May 6,  the IRS issued Final Regulations for administration of this new mandatory withholding – and at the same time, pushed the applicability date back an extra year to the beginning of 2013.

The Final Regulations established exemptions and limitations for section 3402(t) withholding. For instance, no withholding is required on payments under $10,000.  And, political subdivisions of a state (and their instrumentalities) are not required to withhold at all if their total non-payroll payments are under $100 million annually. 

You can read the complete Regulation on the Federal Government Printing Office website at    

At the May 6 House Subcommittee hearing, six of the seven witnesses asked Congress to repeal Internal Revenue Code (I.R.C.) Section 3402(t).  The seventh witness, from the Department of Defense, did not specifically ask for repeal but expressed concerns about the cost of implementing the withholding requirement and potential negative impact on some suppliers.   

Will section 3402(t) eventually be repealed, like the expansion of I.R.C. Section 6041 Form 1099-MISC tax reporting was finally repealed after more than a year of discussion?  We’re not taking bets, but we are closely monitoring the debate.